A family defends its honor after settling lawsuit over its failed bank

The Federal Deposit Insurance Corp. has settled its lawsuit against former owners, officers and directors of failed Mutual Bank of Harvey for $14 million, freeing the family that owned the bank to speak out against the agency.

Indian-American-owned Mutual Bank, best known for former CEO Amrish Mahajan's close ties to now-imprisoned former Illinois Gov. Rod Blagojevich, was the Chicago area's costliest bank failure among the dozens regulators closed since 2009. Its demise is projected to cost the Federal Deposit Insurance Corp.'s insurance fund more than $825 million, according to the agency's most recent estimate. At its peak, Mutual Bank held $1.7 billion in assets.

The Dec. 15 settlement (Mahajan was among the defendants; he was barred from the banking industry in 2013) concludes the lawsuit brought more than four years ago by the FDIC. The suit sought $130 million in damages and painted a picture of a family that raided its bank for personal expenses like a lavish wedding reception and extracted millions in dividends as the lender lurched toward its end.

The Veluchamy family, which owned the bank along with several other businesses, is mired in Chapter 7 bankruptcy proceedings. In addition to the loss of Mutual Bank, all of the family's other businesses have been wound down in Bankruptcy Court.

A $50 million judgment against the family, since reduced to $40 million, is pending appeal in the 7th U.S. Circuit Court of Appeals.

But in the first remarks by a family member since the FDIC filed its lawsuit, Arun Veluchamy, son of former Mutual Bank Chairman Pethinaidu Veluchamy, blasted the FDIC and defended his family's reputation.

“This was a frivolous case; they never had a case,” he said in an interview.

He characterized the settlement—no defendant admitted liability—as similar to other agreements in which defendants agreed to settle in order to get the issue behind them.

The settlement doesn't detail where the cash is coming from, but it appears to be a combination of money from the Veluchamy family's bankruptcy estate and insurers for the directors and officers.

An FDIC spokesman declined to comment.

Ariel Weissberg, the Chicago-bsaed bankruptcy attorney for Arun Veluchamy and his sister Anu Veluchamy, said, “The settlement was a good opportunity to amicably resolve difficult litigation for the mutual benefit of all the constituents. It is a fair settlement under the circumstances.”

Attorneys for the other defendants, including Mahajan, didn't respond to emails requesting comment.

The agency's complaint laid out several unusual allegations, including that the bank spent $250,000 to cover some of the cost of Arun Veluchamy's 2008 wedding at the Sheraton Chicago Hotel. The bank's board approved the spending as a business item.

In the interview, Arun Veluchamy said the reception, attended by more than 1,000, cost more than $1 million. The $250,000 laid out by the bank paid for attendance by bank employees and customers. That was in lieu of an annual event Mutual Bank would host each autumn to celebrate the Indian holiday of Diwali, he said.

The family paid the rest of the funds for the reception, he said.

“They twisted everything around,” Veluchamy said of the FDIC.

Separately, the agency sought to recover millions the family had collected in dividends from the bank.

But, Arun Veluchamy said, Mutual Bank was family-owned and registered as a “Subchapter S” company for tax purposes. Closely held companies don't pay federal income taxes; instead, their individual owners must cover those. And companies routinely pay dividends to their owners to cover the tax payments.

All of the dividends the Veluchamys collected from Mutual Bank went for taxes or interest payments on the bank's debt, Veluchamy said.

“My family never took a single penny out of the bank,” he said.

In fact, the Veluchamys plowed millions into the bank while it was teetering in an effort to save it, he said, and lost that investment when Mutual Bank failed in 2009.

The $14 million the FDIC collected in the settlement is not the largest legal damages award the agency has obtained from the failure of a Chicago-area bank. That “distinction” is held by ShoreBank, the South Side community bank. Former officers agreed to pay $17 million in a settlement finalized late last year. The money is believed to come from an insurance policy.

But the FDIC is not done with the Veluchamys. It retains a $9 million claim in the yet-to-be-finalized bankruptcy. The lion's share of the proceeds in that case will go to Bank of America, which has battled for years to recover the $40 million loan plus interest made to Mutual Bank's holding company by LaSalle Bank. Bank of America acquired Chicago-based LaSalle in late 2007, less than two years before Mutual Bank failed.

Still, the settlement of the FDIC's lawsuit is an important milestone, Arun Veluchamy said.

“It's been tough and frustrating,” he said. “As a family, we're just happy to get this big gorilla off our back.”